Tuesday, 12 March 2019

If you enjoyed the last two years and want more of the same, vote for May’s deal

Trade
negotiations happen after the Withdrawal Agreement (WA) is signed, so
why don’t those wanting a softer Brexit just vote for the WA and
argue about trade later? The Political Declaration which does talk
about trade is vague and non-binding. The reason is straightforward.
Parliament will get very little say on the framework for those trade
talks. The only real chance most MPs will get to influence the type
of trade relationship the UK has with the EU is by directing the
government now, as the price of passing the WA.

However
so far parliament has largely failed to do that, largely because
Conservative MPs have put party unity above the future health of the
country. So what will happen to politics and the economy if
parliament votes to pass May’s deal, either today or in a few
months time? The first and well known point to make is that nothing
would immediately change as far as UK firms and citizens are
concerned, because we would start a transition period where we remain
inside the Customs Union (CU) and Single Market (but no longer have
any say on the rules of either). There will be little economic bounce
from ending No Deal uncertainty, for reasons outlined below. So the
immediate action will be about the politics of negotiating what
happens after the transition period ends.

If
you want to know what that would be like, just look at the last year
or two. Most of the arguments within the Conservative party over the
last year or so have been about trade, and not the content of the WA.
So signing the WA settles very little. It does mean that we have
signed up to the backstop, but May still pretends that this backstop
means we can still stay outside the CU. I cannot see Brexiters meekly
accepting that the UK should join the CU either. We will continue to
have endless discussion of unicorn ‘alternative arrangements’ for
the Irish border designed only to avoid us being up to a CU. The
inevitable truth
of course is that the backstop implies some part of the UK has to be
in the CU, but as the last two years have shown large parts of the
Conservative Party refuse to accept reality when they don’t like
it.

At
some point during the transition period Theresa May could be replaced
as Prime Minister. It seems very likely, given the views of
Conservative Party members on Brexit, that a Brexiter will be elected
in her place. The likely outcome of that, as far as Brexit is
concerned, is either that nothing changes, or that the government
attempts to persuade the EU to do the impossible.

For
example Theresa May is determined that we should leave the Single
Market (SM) because her primary aim is to end Freedom of Movement
(FM). Any successor is likely to want to leave the SM because they do
not want to be bound by EU regulations on minimum workers rights or
the environment. Because of the economic damage that will cause (see
below) the government will attempt to get a trade agreement with the
EU that mitigates that harm. They will find out, yet again, that it
is impossible to get anything close to the benefits of the SM without
being in the SM. And because the UK will not want to accept that, the
negotiations will go on and on.

But
at least No Deal will be off the table? Unfortunately just as you
think you have avoided one cliff edge, another appears. If no trade
deal is done during the transition period, we crash out much like we
would with No Deal now. And the Brexiters in government will be
saying not to worry the EU always cave at the last minute. They will
fight extending the transition period from 21 months, even though it
is impossible to negotiate a trade agreement in that time, because
the ERG wants to fall off a cliff.

In
short, if May’s deal is approved we can look forward to a politics
dominated by internal squabbles within the Conservative Party, and
the absence of constructive negotiations with Brussels, for perhaps
the next four or more years. Much as we have seen for the past two
years. This is because the WA does nothing to resolve internal
Conservative conflicts, and more fundamentally conflicts inherent
with Brexit itself.

If,
despite it all, the government manages to negotiate a trade agreement
with the EU, what will be the economic and political consequences for
the UK? Will it all be worthwhile in the end? A good guide to the
economics is the study
involving a collaboration between the Centre of Economic Performance
and The UK in a Changing Europe, which is both authoritative and
representative of similar work. They believe that from 2030 onwards
UK GDP per capita will be lower by between 1.9% and 5.5% as a
consequence of leaving the Single Market. The midpoint of that range
represents lost resources for each household of about £3,000 each
year. There will of course be a large hit to the public finances,
implying higher taxes or less public spending, even after allowing
for an end to contributions to the EU.

Why
such a large range? The 1.9% mostly comes from the direct effects of
lower and more costly trade, using standard trade modelling
techniques together with reasonable estimates of the barriers created
by leaving the SM. The government using a similar model get similar
numbers. The higher figure in the study’s range is based on
empirical evidence for the impact of trade on productivity, which
captures other effects such as lower foreign direct investment or
reduced competition. Because the empirical evidence captures many
more effects than the model, we would expect it to be larger. Those
who dispute numbers of this scale in this range have to explain not
only why the models, including those used by the government, are
wrong but also why the simple correlations between trade and
prosperity more than back the models up.

Our
best guess is that we have already lost over 2% of GDP as a result of
stagnant investment and sterling’s depreciation. As a result, most
people will probably not notice the economic impact of ending the
transition period, because most of the firms that were going to leave
will have already left as a result of cliff edge uncertainty. Instead
Brexit will be a gradual decline in the UK relative to the remaining
EU.

What
about Global Britain? Most trade agreements involve tariff reduction,
so being in the CU largely limits the scope for Mr. Fox to do new
trade deals. In addition, who would want to harmonise their
regulations with the UK, when the gains from doing the same for the
EU are much greater. A more likely outcome is that we harmonise our
regulations with the US.

The
government will be desperate to sign a trade deal with the US to show
that ‘global Britain’ is more than a slogan, and that means the
US will largely get their way in terms of regulations (including food
standards) and participation in the NHS. Thus the longer term
political consequence of parliament agreeing to May’s deal is the
gradual transition of the UK into a US style economy.

In
an age where the regulations governing trade in goods and services
are increasingly decided by large regional blocks, the only
rationalisation of Brexit that makes any kind of sense is that we
move from the EU block to the US block. That is what a lot of the
Brexiters want, which is why they resist the backstop so much,
because that ties our tariffs to the EU. But the political
consequences of tariffs are less important in shaping an economy than
regulations on things like working conditions and the environment.
That is why, even with the backstop, Brexit will mean we will become
more like the US economy. Whatever the merits or otherwise of that, a
big difference is that we had a say in how the EU is run but we will
have none in what the US does. A 51st state without representation if
you like. Taking back control it is not.

7 comments:

Are the free market fundamentalist de-regulators in the Tory Brexit side bad people? Yes. Should we do a trade deal with the US? No. Nonetheless your post illustrates a central problem with the liberal Remainer case.

You can't say "the relationship between trade and prosperity" as if this implies it should take priority over sovereignty when you don't want us to have the additional "prosperity" that extra trade with the US would mean. This is assuming EU regulation is good, US deregulation is overall bad, and working backwards from that Europhile sweet spot. The public knows it's tendentious. We can also cherry pick what we want to sign with the US and leave out other stuff if we like e.g. agriculture. After all, it has to pass the Commons! Ukraine did the same with the EU.

This will also put such Remainers into the position of arguing that sovereignty is good and trade is bad...

2-5% per capita GDP difference over ten years is fanciful unless you think we accelerated economic growth that much in the ten years after 1973. Does anyone think so?

John Weeks found the Single Market didn't even increase trade between EU members, so like you he reaches for "consumer protection" as being a more important objective all along.

If we want to stay out of the clutches of the American market fundamentalists we should just argue against market fundamentalism. Not use the EU as a shield against this. EU membership has to be worth it for its own sake.

"In an age where the regulations governing trade in goods and services are increasingly decided by large regional blocks" then unless Brexit can be stopped we should simply change the "age". There is no point in extrapolating from today. Or if there is, consider that the Trans Pacific Partnership is dead now. "Increasingly" eh?

If we had so much say in how the UK is run, why are we losing Japanese car manufacturers because the EU and Japan agreed to end tariffs? Or was that a case of trade = prosperity again?

I might add to my above comment, I'm persuaded by Coutts and Gudgin that there really isn't much if any correlation between trade and productivity between developed countries. And NAFTA didn't look great for Canada, presumably because the less efficient businesses got killed of by it at the start, leaving more efficient ones yes, as well as unemployment and other damage which only gradually heals.

The real reason to want to stop or delay Brexit should be fear of a recession caused by the disruption. This could be cushioned by state aid (e.g. to dairy farmers in Northern Ireland, manufacturers of inputs for the EU, etc), a big fiscal stimulus, or a long transition period to enable firms to get ready for changed trade patterns and the introduction of tariffs and customs checks.

From the CEP report: "it confirms that the Common Travel Area between the UK and Ireland will continue as now, meaning that the prospect of the UK fully ‘controlling its borders’ with respect to the movement of people remains as far away as ever"

This is an ignorant comment. The UK and Ireland share port and airport passenger lists to control illegal immigration from outside the EU, they can do the same for EU passengers so that those not eligible for the CTA can't use it.

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